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Derivative claims by limited partners

29 January 2013

​Certain Limited Partners in Henderson PFI Secondary Fund II LLP (a Firm) v (1) Henderson PFI Secondary Fund II LP (a Firm) (2) Henderson Equity Partners Limited (3) Henderson Equity Partners (GP) Limited [2012] EWHC 3259 (Comm), 16 November 2012

A claim against the manager of a limited partnership was a partnership asset and could not be pursued by any limited partner individually. There were special circumstances making it just to allow a derivative claim to be pursued but in so doing the limited partners would be taking part in the management of the partnership business and would therefore become liable to the creditors of the partnership.

The facts

The first defendant, a limited partnership (the Partnership) was established in order to invest in PFI and PPP concession companies held by John Laing plc. The claimant limited partners' (the Limited Partners) fundamental allegation was that the second defendant manager (the Manager) and third defendant general partner (the General Partner) did not cause the Partnership to invest in a portfolio consisting exclusively or principally of PFI concession companies, as they say it was required to do.

The relationship between the parties was governed by the partnership agreement, the Limited Partnerships Act 1907 (the Act) and the management deed under which the General Partner appointed the Manager, a company in the same group as the General Partner. The Limited Partners claimed that neither the investment nor the way in which the benefits and burdens of the investment were allocated between the Partnership and another limited partnership which had also invested were authorised by the partnership agreement or by the management deed.

The Limited Partners alleged that the General Partner and the Manager, in breach of the agreement and deed, had caused the Partnership to invest not in a portfolio consisting exclusively or principally of concession companies, as it was required to do, but instead in a corporate group including substantial quantities of other assets. They sought to bring those claims as derivative claims on behalf of the Partnership since section 6(1) of the Act prevented them taking part in the management of the Partnership business, including the conduct of proceedings, which was a matter for the General Partner.

The court was required to determine preliminary issues relating inter alia to whether the Limited Partners could bring a derivative action against the Manager and the General Partner and whether they could do so without potential liability either for the debts of the Partnership or for the costs of the derivative actions.

The decision

Derivative claim against General Partner

Mr Justice Cooke found that the potential claim against the General Partner was that of the individual Limited Partners and was not a Partnership asset. Each Limited Partner had its own contractual or fiduciary claim for its own loss. The Partnership, which consisted of the Limited Partners and General Partner together, had no form of joint right or claim against the General Partner. None of the provisions of the partnership agreement provided for the General Partner to be liable to the Partnership as a whole, even if that was possible under the general law. The General Partner could be sued by any Limited Partner in respect of its liabilities under the partnership agreement and there was no suggestion that that involved management by the Limited Partner of the partnership business within section 6 of the Act. There was therefore no need and no room for a derivative action on the part of the Limited Partners against the General Partner.

Derivative claim against the Managing Partner

The claim against the Managing Partner was held to be a Partnership asset and could not be pursued by any of the Limited Partners individually. If the claim was to be pursued against the Managing Partner for breach of the duties governed by the management deed, either the General Partner had to sue in the name of the partnership, or it had to be replaced by a new general partner who would sue, or a derivative action had to be permitted.

The court had to consider whether there were special circumstances which would justify a derivative action in the light of the alternative rights and remedies available, (Roberts v Gill & [2011] 1 A.C. 240 applied). The merits of the claim could play little part in the assessment unless they were very strongly in favour of one party or the other (Kleanthous v Paphitis [2011] EWHC 2287 (Ch) considered). The existence of an alternative remedy was a factor but not conclusive, (Hughes v Weiss [2012] EWHC 2363 (Ch) considered).

The General Partner could be removed under the provisions of the partnership agreement, with consequent removal of the Managing Partner, but the evidence showed that that course had such disadvantages that it was not a realistic course. The relationship between the General Partner and Managing Partner meant that there was an irreconcilable conflict of interest built into the architecture of the Partnership. That meant that the Partnership's prospects of obtaining redress against the Managing Partner via the route provided for in the agreement and the Act were virtually eliminated. This was a special circumstance which meant that a derivative action should be permitted to avoid injustice.

Potential liability of Limited Partners

Having found that a derivative claim could be brought against the Managing Partner, the court then considered the potential liabilities that the Limited Partners might incur in doing so. If the Limited Partners pursued a derivative claim against M they would be acting in the management of the partnership business within section 6(1) of the Act and liable accordingly.

Section 6 of the Act provides that, "A limited partner shall not take part in the management of the partnership business, and shall not have power to bind the firm…If a limited partner takes part in the management of the partnership business he shall be liable for all debts and obligations of the firm incurred while he so takes part in the management as though he were a general partner."

The court confirmed that the effect of s6(1) was that during the period in which a Limited Partner took part in the management, it would "… forfeit [its] limited liability and render [itself] liable to creditors of the Partnership generally, as if [it] were the General Partner, for the period during which such claims are pursued."

The Limited Partners had also sought a pre-emptive costs order that they should be indemnified out of the Partnership's assets in respect of the legal costs of the derivative claims. The court declined to make such an order since it could not be satisfied that a trial judge would order the costs to be paid out of the Partnership assets. The court also confirmed that the unlimited liability imposed by section 6(1) of the Act should not be restricted to the costs of the action.

Comment

Although Mr Justice Cooke found that the Limited Partners were entitled to pursue a derivative claim against the Manager appointed by the General Partner, in order to do so they would lose their limited liability status, which they may well not be prepared to do. Unfortunately however for the Limited Partners, they were also ordered to pay the costs of the preliminary hearing in the event that they choose not to pursue the derivative action against the Managing Partner.

Cases involving an analysis of the structure of an English limited partnership are few and far between. This decision does not present any new law, but it is a useful clarification of an area of law that many have previously considered uncertain.